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CONGRESS POISED TO SETTLE ISSUE OF RETIREE TAXATION

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Congress is poised to end a budding war among the states over who gets to tax the pensions of people who work in one place and retire in another.

The solution pending in Congress is to give the taxing rights to the state where the retiree settles.In the Senate, such a proposal has been rolled into the massive reconciliation bill.

In the House, the measure is freestanding and has been approved by a House subcommittee. Approval is expected within days by the full House Judiciary Committee.

Prospects of House passage have heartened pension benefits experts as well as retirees. For while the Senate has approved the ban twice before, legislation always has stalled in the House.

Those who run pension programs covering 41 million Americans don't want states suddenly strapping pensioners or their one-time bosses with the "administrative nightmare" of figuring out where pension benefits were "earned" by employees who likely moved three, four or more times over their careers, said Sam Murray of the Profit-Sharing Council.

When Bill Hoffman retired as an aerospace engineer, he moved from California to Carson City, Nev., and was surprised to be hit with a California tax bill on his pension even though Nevada has no state income tax.

In 1988, he and his wife Joanne founded Resist, a group opposed to such taxes.

The 41 states with broad-based income taxes have the legal right to pursue taxes on former residents' pensions unless Congress pre-empts them. That right is based on the traditional principle that income is taxed where it's earned, regardless of the time period involved.

Most states don't join in the chase, however, partly for practical reasons.

Of the 13 states that explicitly allow taxation of all or part of former residents' retirement income, only California presently has a program in place to pursue former residents and their pensions.

California collects up to $50 million a year this way, due to stiff penalties and daily interest atop tax bills sent to former residents. It stands to lose $25 million a year in taxes alone on former residents' pensions should Congress approve the ban.

Angered at California's aggressiveness, the no-income-tax states of Florida, Nevada, Texas and Washington have passed laws protecting retirees against pension tax liens .

Meantime, Iowa and New Jersey have stopped tracking former residents to tax their pensions, and state legislators in Idaho, which allows such taxation, passed a non-binding resolution asking Congress to stop the state before it taxes ex-residents' pensions again.

Although states seem consigned to losing the right to tax former residents' pensions, the question remains: Exactly what retirement income will be included?

States are willing to forgo taxes on ordinary pensions and retirement savings plans such as 401k programs in which more than 18 million corporate employees participate, said Verenda Smith of the Federation of Tax Administrators.

"Golden parachutes" and other incentive packages typically paid to top corporate executives, law firm partners and even high-priced athletes are deferred compensation, not pension savings, she said.

She added that stopping states from taxing such income would invite tax avoidance schemes so that people making top dollar could deliberately structure their pay to skip state taxes entirely.